Commonwealth warns Govt. that decommissioning cost can easily move from US-millions to US-billions in absence of strict monitoring policies

Jan 12, 2023 News

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By Renay Sambach

Kaieteur News – The Commonwealth Secretariat is warning its member countries in the oil and gas industry of the uncertainty of decommissioning costs, which can result in the price tag to restore the ocean floor, easily moving from US-millions to US-billions.

As a result, the Commonwealth urged Governments to ensure they implement policies and regulations that would require oil and gas companies giving regular estimate on decommissioning costs.

Kaieteur News had reported that decommissioning is a complex and costly process at the end of the economic life of an individual oil and gas project. It involves the safe plugging and abandoning of oil wells, removal of structures and restoration of the surrounding areas.

The Commonwealth Secretariat recently released a new practical guide to help Governments manage costly oil and gas decommissioning activities, which are expected to surge as a result of the global energy transition.

In its guide titled, “Oil and Gas Decommissioning Toolkit,” the Secretariat highlighted eight key issues of decommissioning and made suggestions for Governments. One of the issues highlighted is the ‘Scale and uncertainty of decommissioning costs.’

It was stated that decommissioning cost, like development cost can vary significantly from project to project and that it can easily amount to billions of US-dollars to restore the ocean floor.  Added to this, is that decommissioning costs will be of the magnitude of development costs and subject to a large uncertainty range.

The Commonwealth explained that estimating decommissioning cost for a particular project requires taking into account several different aspects like: making assumptions on cessations of production (CoP), when decommissioning operations will occur, how each aspect of the operations will be performed (wells, pipelines, platforms etc.), and estimating how much those cost will be in the future, taking into account the escalating estimates owed to inflation.

Noteworthy, it was stated that, “Credible estimates for decommissioning costs therefore require various technical experts’ inputs; this is similar to estimating development costs, but with the added complexity of the uncertainty of timing (several decades into the future).”

According to the Commonwealth Secretariat, while benchmarking is often used in the industry for estimating costs, the availability and access to comparative data – on the global scale – for decommissioning is relatively small.

“The United States (onshore and Gulf of Mexico) and the North Sea are noted areas with a history of decommissioning activity and, as such, tend to be used as benchmarks for estimating costs,” it was stated.

However, the Secretariat pointed out that while the aforementioned will be useful, it is important to understand the underlying assumptions that have been used to estimate the costs, as small changes in the assumptions can lead to very large changes in the total cost. “Different regulatory requirements will also have cost implications. Regional differences in weather, sea states, water depths and distances from shoreline facilities can also affect decommissioning costs,” it was highlighted.

Additionally, the Commonwealth Secretariat listed five implications for Governments to take into consideration when dealing with the uncertainty of decommissioning cost which can skyrocket.

The Secretariat explained that given the fact that decommissioning cost estimates are uncertain it requires regular reassessment during the production phase by Governments. The body suggested that Governments should understand how decommissioning costs are calculated and what the underlying assumptions are.

According to the guide, the assumptions of future events should be supported by sufficient objective evidence and, “Given its nature, detailed reforecasting in the first years of production is likely to yield very little benefit.”  To this end, the Secretariat highlighted too that it would be foolhardy to wait until only a few years before cessation of production to look at detailed cost estimates.

The Commonwealth also urged Governments to understand how decommissioning is being treated in oil and gas companies’ financial statements, as this could prove a helpful basis for regulators to understand costs on an ongoing basis.

Another key implication is that Governments should have policies and regulations in place that require licensees to estimate decommissioning costs and update them regularly. It was stated too that the licensees should also be required to update decommissioning costs when changes to the operation of the field are likely to materially affect these costs. They also urged Governments to encourage transparency.

Additionally, it was noted that regulators working together with the industry can develop a standardised approach and definitions for estimating decommissioning costs and to provide templates to operators – this could aid in ensuring completeness in costs estimation, consistency and comparability among operators.

The Commonwealth Secretariat’s guide to decommissioning comes at a time when American oil giant, ExxonMobil’s affiliate, Esso Exploration and Production Guyana Limited (EEPGL) has been taking out money from Guyana’s oil production for decommissioning.

Exxon’s affiliate is the operator of Guyana’s lucrative Stabroek Block which has over 11 billion proven barrels of oil.

Under a signed deal – the Production Sharing Agreement (PSA) – the oil giant has been taking out money from the first day of production (2019) to set aside as a decommissioning fee. It should be noted that the revenue has to be set aside in a special account, held by the Government to cover these costs when the time comes.

However, the Stabroek PSA jumps off the precipice of international best practice, and into a bottomless pit of abnormality on this front. ExxonMobil and its Partners which include Hess Corporation and CNOOC Petroleum Guyana Limited are able to benefit from a lopsided system that allows them to keep decommissioning funds in their pockets.

Based on its 2021 financial statements, for 2020 and 2021, ExxonMobil and its partners, Hess Corporation and CNOOC Group, have recovered a whopping US$355.7 million for decommissioning costs which would be incurred in another 18 years for the Liza Phase One Project.

During an engagement with the media last June, ExxonMobil Guyana acknowledged that decommissioning funds are not needed until 20 to 30 years down the line. Be that as it may, the company noted that the provisions of the 2016 Stabroek Block deal allow for early recovery.

However, the oil giant assured nonetheless, that when Guyana needs that money for clean-up, the money will be handed over.

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• Commonwealth, cost, decommissioning, Exxon, oilandgas, Renay Sambach

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